How Atlassian keeps making money, even after it stopped selling to developers

Atlassian no longer focuses on selling directly to developers, but the lessons learned from that practice continue to make it boom.

Image: iStockphoto/Rawpixel Ltd

A few years back, Atlassian president Jay Simons revealed to me the secret of Atlassian's success, despite selling to the most parsimonious of buyers: Developers. As he told me, it took "lots of persistence and $0 in venture capital funding." By forcing the company to grow organically, Atlassian managed to build a sustainable business, and one that is currently valued at roughly $6 billion, double what it was when Simons and I spoke in 2014.

Along the way, Atlassian has debunked many of the fallacies that infect the standard technology model, such as the idea that a company must raise and spend mountains of cash in pursuit of growth at all costs. The company has largely stopped selling to developers but has kept its commitment to a bottoms-up approach to driving sales through an enterprise.

Lots of money from lots of little deals

Atlassian's virtually venture capital-free existence (the company raised money but only to provide employee liquidity) has pushed it to grow at a prudent clip, adding R&D and other functions only when matched by a commensurate rise in revenue. (This fits Indie.vc founder Bryce Robert's observation that "The biggest disruptive threat to venture capital is when the very best founders realize they need very little of it to scale." Atlassian was an early indicator of this trend.)

Adding to this, the company got started by selling to an extraordinarily difficult audience—developers—and couldn't charge them big sums. Not if it wanted to have any chance of success, anyway.

In 2014, this model resulted in approximately 37,000 organizations paying Atlassian $200 million. Today, as noted on Atlassian's recent earnings call, both customer growth and revenue growth have exploded to nearly 70,000 customers...

Atlassian

...and a projected $615 million in 2017 revenue:

Atlassian

Importantly, while Atlassian's growth rate has slowed, which is expected as the revenue numbers get bigger, the model of ensuring profitable growth continues unabated.

It's a policy that puts it at the head of a growing class of companies that abide by the so-called "Rule of 40," as Shira Ovide and Rani Molla have highlighted, whereby a company's rate of growth and its free cash-flow margin tally up to 40% or better ("a handy shorthand for the ideal financial condition of a software company"). As the authors show, Atlassian's Rule of 40 is more like a Rule of 60, beating out other well-run companies like ServiceNow, Red Hat, and more.

Still profitable, but not developer-led

Perhaps even more interesting, however, is the fact that Atlassian, once the choice of code-writing software developer teams, now sees most of its revenue coming from a different demographic, as Atlassian co-CEO Scott Farquhar declared on the company's earnings call:

[M]ost of the users using our products today are not writing code. People using all of our products are in broader business teams today because we are bottoms up in an organization and we start with small teams.

Those teams, he went on to explain, may start with one product (like Confluence) and then it spreads to other teams, as well as adoption of new products ("natural expansion of moving from one product to many and moving from one team to many"). The key, as it was in 2014, is to keep the price tag low enough that experimentation is a small decision, as co-founder Mike Cannon-Brookes indicated on the earnings call:

[B]ecause we have such attractive pricing for our customers, our customers are finding thousands of use cases for our products that we don't really even go head-to-head in any sort of competitive battle....[W]e're getting bottoms up and spread across [an enterprise].

To deliver that kind of pricing, however, isn't just a matter of slapping a low price on the product. It requires, as Farquhar called out, "your entire organization to be built up around high volume, lower touch models."

And this might start with a focus on developers, who prefer to build if the price for buying is too high. In other words, the best enterprise businesses of tomorrow may well be those focused on cash-strapped developers today. That's how AWS started, and it looks set to define the next few decades of enterprise computing. Atlassian, with a similar mentality, could very well define the future of enterprise collaboration.

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By Matt Asay

Matt Asay is a veteran technology columnist who has written for CNET, ReadWrite, and other tech media. Asay has also held a variety of executive roles with leading mobile and big data software companies.

Disclosure

Matt is currently head of the developer ecosystem at Adobe. The views expressed are his own, not those of his employer.

Full Bio

Matt Asay is a veteran technology columnist who has written for CNET, ReadWrite, and other tech media. Asay has also held a variety of executive roles with leading mobile and big data software companies.